New residential construction (Excerpts from The Matusik Report Sept.2009) For full details go to www.matusik.com.au
"Economists see residential investment set to be the standout sector of construction spending over the next 12 to 18 months. Their thinking: improved affordability (from the significant fall in mortgage rates, first home buyers boost), = improved dwelling construction. The theory assumes that the boost, which will initially drive new construction, will be replaced by other buyer types once it is phased out.Over the past few years, around 150,000 dwellings have been built across Australia annually; however, recent building approvals imply more like 130,000 commencements per year. But for reasons outlined above, some are forecasting that new housing starts will exceed 160,000 during 2009/10 and be even higher during 2010/11. Whist we would like to agree, we think that such calls are very optimistic, and here’s why:
* Only 11% of all first home buyers bought a new dwelling with the recent boost monies, according to official records. The reason is that the price gap between new and existing homes is about 30%. Until this gap shrinks considerably, most buyers will buy an established residence over something new. Bottom line: the first home boost has not kick-started new construction.
* New housing starts are also down the most in attached dwellings; due partly to the price gap and partly to the financial crisis. With traditional development finance all but evaporated, developers are facing the prospect of proceeding with fewer newer apartment projects. To compound this, planning constraints, high infrastructure levies and the unionised cost of apartment construction continues to push costs up and to depress returns. Add on the GST, an immediate, and unrecoverable, 10% on the cost of all new accommodation, and we have a situation where new attached housing starts are likely to stay stuck in the mud.
* New housing starts are also likely to remain lacklustre at best in Queensland until infrastructure levies are reduced. Queensland, when it comes to new housing construction, is doing it tough.
Yes, lower interest rates do have a positive impact on new housing construction. Over the last three cycles, whenever interest rates dropped, new housing starts picked up about six months later. However, interest rates started dropping about 12 months ago and yet, despite the boost and great slabs of fiscal stimuli, we have not yet seen a consistent lift in new residential construction. The reason - a pick up in new housing starts took place in concert with rising full-time employment. So, until we start to see an improvement in full-time work numbers, new housing starts are likely to remain subdued. The real risk is that interest rates could start to rise before we see an improvement in our full-time employment rate. And if that happens, new housing starts could actually fall over the next 12 to 24 months, rather than rise, as forecast."
One impact of the lack of new stock is a lack of competition for existing stock. This should help hold up the price of resale units.
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